Are you Ready for a Debt Market Bubble?

S4F Crazy Debt Market Bubble @ SavingsForFreedom
We are living in the craziest market environment of our lives. These conditions are not sustainable but while they last investors prone to risk-taking will profit.

We are living extraordinary times. Central banks are printing billions of digital and paper money and everyone is buying stocks, bonds, P2P loans, crypto, gold and enjoying the wild ride… the only problem is that the numbers don’t answer anymore to reality. We are funding companies that should go down, financing projects and individuals that are bankrupt or simple frauds…

N26 The Mobile Bank @ Savings4Freedom

We are Living Extraordinary Times

I would never imagine living in such extraordinary time for those that know history and understand market cycles. The last 10 years were a fantastic run for anyone investing in the stock market, but looking to the fundamentals, the numbers don’t match reality anymore. Nations, companies and individuals have rigged conditions to access the debt market and business and personal finance models that in normal circumstances would be unsustainable, are able to survive by issuing new debt to pay off existing liabilities in this cheap money era.

Investors Prone to Risk Taking are Winning

In the past few months, thousands of new investors flooded the stock market and are outperforming it while the “smart money” loses their investments on bearish bets. It makes you think: why have an investing process when you can buy a bankrupt company and make 100%, or buy a junk bond and make 40%? And all in a day’s work. Why even consider investments with stable fundamentals anymore? Government bonds or defensive stocks are boring. It’s time to speculate instead. What could possibly go wrong?

A P2P Lending Risk Assessment

In a world of zero percent interest rates, P2P lending can look mighty tempting for yield hungry investors. But the problems with P2P lending are obvious when compared with stock market assets in these crazy times:

  • Your gain is strictly limited to the interest rate, while your loss can be 100% creating a negative risk/reward ratio;
  • Your probability of gain or loss is impossible to define, due to the highly different investment and guaranty models presented by P2P platforms;
  • The risks associated to a P2P debt bubble market are like driving without seat belts: nothing bad happens for years, and you conclude that the risk is small. However, when a crash inevitably happens, the results are devastating, and there’s no collateral or insurance for your capital at risk.

Stocks may recover and even defaulted junk bonds may eventually repay 30% of principal, but defaulted P2P loans almost never pay off. The P2P platforms will keep any funds recovered by the collection agencies or the courts.

A Path for P2P Lending Investments Now

If you believe, as I do, that P2P lending should be one among the asset classes in your portfolio how can we minimize the risks presented above? Only through tight due diligence of P2P Platforms and Loan Originators. But that is a growing difficulty based on so many frauds and manipulations. I hope to explore this topic during next week and present my ideas on the subject…

What is your opinion?

Are you moving your investments from P2P lending to the stock market? How are you managing the additional risk of current market conditions? Remember that this will be a long process and it is critical to keep a safe emergency fund to deal with what the future will bring.

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